December 5, 2005

Annual budget ballyhoo is much ado about nothing

In 1990, the Central Bank’s entire economic fraternity crammed into a small office and giddily jotted down figures to assess the impact of the various numbers pronounced by the minister for finance.

To the innocent passer-by, utterances from the Central Bank’s makeshift command and control centre such as “Oh, he got a big EBR [exchequer borrowing requirement]“or “I wouldn’t believe those interest rate assumptions” or “That’ll add two points to inflation” must have seemed like the demented ravings of an obscure sect.

Yet this ritual was important. Back then, Budget Day was significant. Today, despite all the evidence suggesting that it is now little more than a charade, Budget Day is still regarded as among the most venerable events in the economic calendar.

It is not just the Central Bank’s economists who are at this carry-on. All around town, the scene is the same. On Wednesday afternoon in the banks, the stockbrokers, the insurance companies, the ESRI,NESC, even in academia, as well as the business desks of all major newspapers – anyone who claims to read economic tea leaves – will be frantically scribbling down numbers and plugging these into real or imaginary economic models.

At about 4.30pm, my computer will start registering incoming mail as the first of the stockbrokers’ ready-reckoner reports hit the street. These hot-off-the-press updates signal the beginning of a media frenzy that will take us through the drivetime radio shows into a Six-One news ï¿½budget special’ and another ï¿½budget special’ on Prime Time.

Throughout the day, economists and commentators will spin their budget stories. The next day’s papers will carry the budget as front page news, and most will have special pullouts. Economists from the banks, stockbrokers and pension companies will host breakfast meetings at swanky addresses all over town to dissect and explain how the budget will affect the economy.

But this flurry of activity is all a fraud.

The budget is a sham. It has little or no relevance to the economy. The entire event is a jaded quasi-religious ritual that harks back to the age of Angel Delight, Ford Cortinas and Jimmy Keaveney.

Back in the 1970s and 1980s, budgets were important and the government set the tone for the economy. The state was the biggest borrower in the country, and was fast on its way to becoming the biggest employer. It provided most of the essential services.

If you wanted to get a bus to Cork, fly to London or get a boat to Holyhead, you engaged the government. Every time you made a phone call, you employed the state.

At a macro level, interest rates and the exchange rate (after 1979) together with the perception of the country abroad, were determined by the relative delinquency of government policy. The state controlled close to 50 per cent of the entire economy.

In the old days, the financial markets watched the budget like hawks. If the government was perceived to be borrowing too much, investors worried about the currency. The reasoning behind this was that too much borrowing implied that the state was pumping too many new pounds into the system. The increased supply of these new pounds implied that the exchange rate had to fall.

To compensate for this possibility (and for the fact that, despite its pronouncements, the Central Bank simply printed money in exchange for government paper, never once making a prudent stand against hyper-borrowing) investors rightly demanded higher interest rates on Irish bonds.

Therefore, the budget affected interest rates, the exchange rate and the government’s huge debt servicing bill. Taken together with tax and Vat changes, the impact of the budget used to be quite significant.

All this has changed. Globalisation killed the Budget Day ritual. Today the forces that affect our lifestyles are dictated by a complex combination of international events and trends. They are also beyond the control of domestic politicians.

Our job prospects are not in Brian Cowen’s gift, nor are interest rates, as evidenced last Thursday. There is little or nothing Cowen can do about house prices or the exchange rate at which companies do business. Tax revenues, determined by growth, limit his room to manoeuvre and, in an economy as open and dependent on trade as ours, growth is determined abroad.

Successive Irish governments have signed up to global agreements on free trade, free movement of capital and, most recently, the EMU project. In the process, our politicians have been writing their own redundancy cheques.

So we are left with an annual political rain dance that dates back to economic prehistory. This antediluvian practice is supported by a fake media frenzy that tells us more about yesterday’s practices than today’s reality or tomorrow’s prospects.

For example, this year there is a huge hullabaloo over government policy and whether it will be the beginning of a series of ï¿½giveaway’ budgets with both eyes firmly on the next election.

Commentators are getting their knickers in a twist over whether the budget will fuel the boom, putting pressure on transport and housing capacity. Yet the budget will inject just over ï¿½2 billion into the economy by way of tax cuts and increased spending. In contrast, the private sector borrowed over ï¿½4 billion last year.

In terms of the overall effect on the economy, cheap available credit had more than 15 times the effect on the economy than anything announced on Budget Day.

The cheap credit was created by global conditions. In fact, the credit was created by the savings of parsimonious Germans and the cash was blown by free-spending Paddies who – for the first time, because of EMU – could borrow from the Europeans at no cost.

Does the budget serve a political purpose? Undoubtedly it does, but only insofar as it is an exercise in optics. Because the difference between the political parties is so slim these days (and, as the economy slows further, it is likely to be slimmer), the budget is more a matter of personalities than policy.

This elevation of the personality underscores the collapse in the budget’s economic significance, and reveals how theatre has replaced policy. Seasoned political hacks are now reduced to bar-room chat and the ï¿½You’d never guess what I heard’ï¿½ school of political analysis.

Over the coming days how many times will you hear drivel like ï¿½Brian doesn’t like being pushed around’ï¿½ in response to speculation about what will be done to childcare or taxes?

The fact that so much of the media makes its living out of generating political stories, watching political figures and reporting on the Dï¿½il, when the real action is elsewhere, is a reflection of how slow the media is to change.

Rather than being a leading indicator, the media is lagging behind the field.

Globalisation has changed everything.

Most of all, it has emasculated domestic politics. Inmost western countries, politics is divorced from the economic cycle.

Every four years or so, we have an election charade that passes for grassroots representation and satisfies the lowest democratic criterion. This game of parliamentary musical chairs will be repeated here in May 2007. When the music stops, it won’t really make a difference to our lives who is left sitting in the big armchair.

Wednesday’s budget and all its razzmatazz from the battered briefcase (or latterly CD-Rom) to the indignant responses from the opposition will all be hot air. You, the sovereign individual – not the government – determine the economic cycle. If you spend, borrow, set up a business, hire someone or get fired, these are actions that matter.

Despite all the hype, economists’ reports and talk, the budget is an outdated ritual that matters not a jot in the face of greater global forces.

May I commend David McWilliams on his excellent article in
yesterday’s SBP. My husband is already a fan and reads the
the column religiously every Sunday and I have now started
doing so too – it’s great to see somebody unafraid to
highlight the facts when so many others are out to ‘save
face’ lest they lose an inch of popularity – in my opinion,
it is this ‘boldness’ that is so lacking in Irish society
today and we need more of his type around. Well done and
keep up the the excellent work.

On the globalised theme, what happenes when global
liquidity we see in house prices and stocks etc.. becomes
global inflation? I hold some Chinese stocks – here is a
summary of one of the last reports –

(NYSE:HNP) ‘Incredibly strong demand means sales have risen
by 45% y/y, but y/y profits have dropped sharply by 35% due
to sharply rising costs – Wages have risen by 30% since
last year, and we are running into problems in obtaining
raw materials, which have doubled and rising in price. The
price of other inputs – transport are also rising strongly’

You’re completely wrong in dismissing the impact of the
budget.
They could raise income taxes…they could put a tax on
second homes…they could change BIK…drink and cigarette
increases…VAT on goods/services could rise…remove tax
incentives…

All these things have a direct impact on the wallet. So to
say “The budget is a sham. It has little or no relevance to
the economy.” is nonsense.